4/3/16: Can Cryan halt Deutsche Bank's decline? Euromoney

Recently, I wrote about the multiple problems faced by the Deutsche Bank (see post here http://trueeconomics.blogspot.com/2016/02/12216-deutsche-bank-crystallising.html).

Subsequently, Euromoney published a well-researched and wide-ranging article on the same subjects that is also worth reading, even though there are quite significant overlaps with my earlier post: http://www.euromoney.com/Article/3534126/Can-Cryan-halt-Deutsche-Banks-decline.html?single=true.

3/3/16: BRIC Composite Activity - February

On a cumulative basis (based on Composite PMIs for each country), the BRIC economies as a group have posted a very disappointing performance in February 2016.

Note: for this index, 100.0 is a zero growth marker.

Russian economy Composite Indicator posted a positive upside surprise, rising from a contractionary reading of 96.8 in January to a weakly-expansionary reading of 101.2. 3mo average through February 2016, however, remains below 100 line at 97.9, which is weaker than the 3mo average through November 2015 at 100.3. The details of Russian Manufacturing sector woes are covered here: http://trueeconomics.blogspot.com/2016/03/2316-bric-manufacturing-pmi-february.html, while details of Russian Services and Composite PMIs upside are covered here: http://trueeconomics.blogspot.com/2016/03/3316-russia-services-composite-pmi.html.

As a result, Russian economy acted as a factor pushing up BRIC rates of growth in February:

In contrast with Russia, Chinese Composite Indicator posted a significant contraction in February, falling from 100.2 (zero growth) in January 2016 to 98.8 (weak contraction) in February. On a 3mo average basis, the index is now at 99.3 for the period through February 2016, up marginally on 98.9 reading for the 3months through November 2015, but down on 102.4 reading for the 3mo average through February 2015. Details of Chinese Manufacturing PMIs are covered here: http://trueeconomics.blogspot.com/2016/03/2316-bric-manufacturing-pmi-february.html, while details of Services and Composite PMIs are covered here: http://trueeconomics.blogspot.com/2016/03/3316-china-services-composite-pmi.html.


India’s Composite Indicator fell from 106.6 in January to 102.4 in February, signalling major slowdown in the rate of economic expansion. 3mo average through February 2016 is at 104.1, reflecting robust growth in January, and up on 102.9 3mo average through November 2015, but below 105.3 reading for the 3 months period through February 2015. The weakness in the Indian economic growth is highlighted by comparison to the historical average, which stands at 109.5.

Per Markit: “February data showed that services firms and goods producers alike registered weaker increases in activity. …Falling to a three-month low of 51.4 in February, from 54.3 in January, the seasonally adjusted Nikkei Services Business Activity Index highlighted a softer expansion of output that was only marginal. Where growth was seen, businesses reported higher levels of incoming new work. Although new orders at services firms continued to rise in February, the rate of expansion eased to the weakest since last November as firms reportedly faced strong competition for new work during the month. A quicker increase in order book volumes in the manufacturing economy was insufficient to prevent growth of private sector new orders from easing to a three-month low.”

Conditions in Indian Manufacturing are covered in detail here: http://trueeconomics.blogspot.com/2016/03/2316-bric-manufacturing-pmi-february.html.


Meanwhile, Brazil remained the sickest economy in the BRIC group. Composite Indicator for Brazilian economy sunk to an all-time low of 78.0 from an already recessionary 90.2 in January. As the result, 3mo average for Brazil’s Composite Indicator was at 85.3, down on already extremely weak 86.6 recorded over the 3 months through November 2015 and on 100.1 3mo average through February 2015.

According to Markit: “The downturn in the Brazilian economy took a noticeable turn for the worse in February. Business activity, new orders and employment all fell at, or near to, the fastest rates since the combined manufacturing and service survey began in March 2007. Companies continued to link the adverse operating environment to the ongoing economic, financial and political crises. …Accelerated downturns were registered at manufacturers and service providers alike, although the slump at services companies was especially severe. At 36.9 in February, down from 44.4 in January, the seasonally adjusted Markit Services Business Activity Index posted its lowest reading in the nine-year survey history. Business activity has fallen in each of the past 12 months.”

Brazil’s Manufacturing PMIs were covered in detail here: http://trueeconomics.blogspot.com/2016/03/2316-bric-manufacturing-pmi-february.html.

The summary of changes in both manufacturing and Services sectors across all BRIC economies is here:

Thus, overall, global GDP-weighted BRIC PMI Indicator (computed by me) fell to 98.4 - signalling moderate or mild contraction, down from January reading of 100.6. The Index is now registering sub-100 readings in seven out of nine last months. Worse, BRIC economies last posted a statistically significant reading for growth back in December 2014. On a 3mo basis, 3 months average through February 2016 is at 99.1, which is basically unchanged on 3mo average through November 2015 (99.0) and significantly lower than the 3mo average through January 2015 (101.8). Starting with February 2015, the index has been averaging zero growth.

3/3/16: China Services & Composite PMI: February

China Services PMI fell to 51.2 in February, from January’s six-month high of 52.4, pointing to a much slower rate of growth than the historical series average of 55.0. This comes on foot of Manufacturing PMI registering an outright contraction in February, with the rate of reduction quickening to the steepest since September 2015 (details here: http://trueeconomics.blogspot.com/2016/03/2316-bric-manufacturing-pmi-february.html).

Services PMI 3mo average through February was 51.3, which is basically flat on 51.2 recored in 3mo period through November 2015 and lower than 3mo average through February 2015 (52.4).

Per Markit: “New business growth also slowed across the service sector in February after a solid rise at the start of the year. Furthermore, the latest increase in new orders was weaker than the long-run trend and only modest, with some panellists commenting on relatively subdued client demand. New orders continued to decline at manufacturing companies, and at a slightly quicker rate than at the start of 2016.”

After posting a weak stabilisation in January (at 50.1), the Composite PMI fell to a recessionary level of 49.4 in February, indicating “a renewed fall in total Chinese business activity in February… to signal a marginal rate of contraction.”
 On a 3mo basis, 3mo average through February 2016 was at 49.7, up on 3mo average through November 2015 (49.5) and down on 3mo average through February 2015 (51.2). Again, last six months we saw averages well below historical average (52.9).

Per Markit, “slower increases in both activity and new orders contributed to a weaker expansion of service sector staff numbers in February. Companies that reported higher staff numbers generally mentioned hiring new employees in line with new order growth. Job shedding meanwhile intensified across the manufacturing sector in February, with the latest decline in workforce numbers the sharpest since January 2009. As a result, composite employment fell at a rate that, though modest, was the quickest in six months.”

This clearly signals that troubles are not over for Chinese economy and also suggests that currently projected rates of growth for the world’s second largest economy are way off the mark. Composite PMIs have now posted sub-zero growth signals in five out of the last seven months, with one other month reading being basically consistent with zero growth. On a Composite indicator basis, China is now the second weakest economy in the BRIC group after Brazil, with Russia overtaking itm having posted a composite index reading of 50.6 in February. Over the last 12 months, the same situation prevailed in July-September 2015, and in November 2015 the two countries were tied for the second worst performance reading.

3/3/16: Russia Services & Composite PMI: February

Russian Services PMI came in with surprising upside that bucked the trend in Manufacturing (see links here: http://trueeconomics.blogspot.com/2016/03/2316-bric-manufacturing-pmi-february.html), posting 50.9 reading in February, up from 47.1 in January. On a 3mo basis, however, 3mo average through February remains below 50.0 expansion line at 48.6, which is actually poorer than 49.6 3mo average through November 2015, although much better than 43.7 3mo average through February 2015. In simple terms, February uptick in growth in Services is fragile, unconfirmed, and at this stage does not constitute a robust signal of economic stabilisation.

Per Markit: “Russian service providers reported a slight increase in their business activity levels during February, driven by an expansion in new orders. However, a rise in new projects could not prevent a further sharp deterioration in outstanding business in the sector. Meanwhile, job cuts were evident while price pressures continued to persist.” Still, “the latest increase ends a four month sequence of contraction. Panel members partly linked rising output to an increase in new export orders, the result of a depreciating rouble.”

Net summary is: February reading for Services is encouraging, but is not yet consistent with sustained stabilisation in the economy. 

This has been confirmed by the Russia’s Composite Output Index which also returned to expansion territory in February for the first time in three months. Per Markit: “however at 50.6, up from January’s 48.4, the latest upturn was relatively weak.” On a 3mo basis, the Composite index is still below 50 at 49.0, which is lower than Composite Index average for the 3 months through November 2015 (50.2) although strongly ahead of the abysmal reading for the 3mo period through February 2015 (46.2).

“A higher level of new business was reported by Russian service providers during February, the first increase in five months. However, the pace of
growth was relatively weak. Anecdotal evidence suggested that the expansion reflected the introduction of new products across the sector. Meanwhile, a slight rise in volumes of new orders were reported by manufacturers this month.”

Again, on the net, Composite PMI figures show the return to growth to be unconvincing at this stage. We will need at least 3 consecutive months of above 50 readings to make any serious judgement as to the reversal of recessionary dynamics in Russian economy.

3/3/16: Long-Run China Tops Scary Charts League This Week

The Truly Scary Chart of the week comes not the courtesy of the world of finances, but that of demographics... and no, it is not of the dead elephants of Germany, Italy and the Euro area, but of the (for now much) alive China:

Yes, 2030s are far away, so level declines are yet to come, but rate declines are already here and it is the rate that matters, not so much the level, when it comes to growth.

3/3/16: Hitting Record Deflationary Expectations & Waves of Monetary Activism

In a fully-repaired world of the global economy...

Source: Bloomberg

Per SocGen, thus, all the QE and monetary activism have gone pretty much nowhere, as deflationary expectations are hitting all-time record levels. And that with the U.S. inflationary readings coming in relatively strong (see http://www.bloomberg.com/news/articles/2016-03-03/socgen-global-deflationary-fears-just-hit-an-all-time-high).

Which might be a positive thing today, but can turn into a pesky problem tomorrow. Why? Because U.S. inflationary firming up may be a result of the past monetary policy mismatches between the Fed and the rest of the world. If so, we are witnessing not a structural return to 'normalcy' but a simple iteration of a vicious cycle, whereby competitive devaluations, financial repressions and monetary easing waves simply transfer liquidity surpluses around the world, cancelling each other out when it comes to global growth.

Give that possibility a thought...

2/3/16: Irish Manufacturing PMI: February

Irish Manufacturing PMI posted a long-anticipated, and relatively mild slip back from a rapid pace of expansion in January (54.3) to shallower growth in February 2016 (52.9).

Despite this fall back, 3mo average Manufacturing PMI for the period through February stood at 53.8, which is above the 3mo average reading through November 2015 (53.6), although well below the 3mo average through February 2015 (56.5).

Per Markit release: “Growth eased in the Irish manufacturing sector in February as new orders increased at the weakest pace since late-2013. Output and purchasing activity also rose at slower rates, but employment bucked the wider trend by increasing more quickly than at the start of the year. The rate of input cost deflation quickened to the fastest since November 2009, with output prices also falling at a sharper pace in response… Where new
orders did increase, panellists often mentioned higher new business from export markets, in turn reflecting new orders from the UK and US. Growth in new export business also slowed, however.”

Good news is: “…the latest solid expansion in production extended the current sequence of growth to 33 months.” Bad news is: much of growth seems to be concentrated in the areas benefiting from weaker Euro, not in the areas of organic expansion.

2/3/16: BRIC Manufacturing PMI: February

BRIC manufacturing sector conditions have posted major deterioration in February 2016 compared to January, marking another ugly month for world’s largest emerging economies.

Russian Manufacturing PMI for February posted a rather unsurprising and relatively mild deterioration from already marginally-recessionary reading in January. Details are covered here: http://trueeconomics.blogspot.com/2016/03/2316-russia-manufacturing-pmi-february.html.

Chinese Manufacturing PMI continued to tank in February, with country Manufacturing sector remaining the weakest of all BRICs, save Brazil, every month since July 2015. The details are covered here: http://trueeconomics.blogspot.com/2016/03/2316-china-manufacturing-pmi-february.html.


Meanwhile, Brazil’s manufacturing recession “extended to February, with a further drop in incoming new work leading companies to lower production and cut jobs again. Such was the extent of the downturn that firms shed jobs at the second-fastest pace since April 2009,” per Markit.

Brazil’s Manufacturing PMI fell from an ugly 47.4 in January to a horrific 44.5 in February, marking 13th consecutive sub-50 reading. On a 3mo average basis, Brazil’s Manufacturing remained in a contraction (45.8) over the 3mo period through February 2016, just as it was in the contraction (44.0 average) in the 3mo period through November 2015. In 3mo period through February 2015, PMI averaged 50.2.

Per Markit: “Amid evidence of an increasingly fragile economy and a subsequent fall in demand, the level of new business received by Brazilian manufacturers decreased in February. Having accelerated to the fastest since November 2015, the pace of contraction was steep. As a consequence, companies scaled down output again. Production dipped at a sharp and accelerated rate.
Supported by the depreciating real, new foreign orders for Brazilian manufactured goods improved for the third straight month in February. That said, new business from abroad increased at a modest pace overall.”

All in, Brazil remains BRIC’s weakest economy in Manufacturing sector terms every month since February 2015.


As in previous months, India was the only BRIC economy with Manufacturing PMI reading above 50.0 marker. In February 2016, Indian Manufacturing PMI stood at 51.1, unchanged in January 2016. The positive impact of this, however, is weak, at 51.1 marks relatively low (by historical comparisons) growth in the Indian Manufacturing sector.

Per Markit: “Manufacturing business conditions in India continued to improve, with new orders, exports, output and purchasing activity all rising in February. However, a faster expansion in new business inflows failed to lift growth of output and workforce numbers were left broadly unchanged again. PMI
data also highlighted a weaker rise in costs and the first reduction in selling prices since September 2015… Reflecting sustained growth of new work, Indian manufacturers raised their production volumes in February. That said, the rate of expansion eased since January and was marginal overall.”

On a 3mo MA basis, Indian Manufacturing PMI averaged 50.4 in 3 months through February 2016, down on 50.7 average for the 3mo period through November 2015 and down massively on 52.9 3mo average through February 2015.

Overall, India remains the best performing economy in the BRIC group, even though its Manufacturing sector growth is now in slow growth mode since September 2015.

In summary, in February, BRIC group of world’s largest emerging markets economies has posted another deeply disappointing performance across the Manufacturing sector. This compounds adverse headwinds in these economies in January and signals strong possibility of the BRICs exerting a significant negative pressure on global growth.

2/3/16: China Manufacturing PMI: February

Chinese Manufacturing PMI for February signalled worsening operating conditions in the sector and marked 12th consecutive month of recessionary readings, reaching 48.0 in February, down from 48.4 in January and down from 50.7 in February 2015.

Per Markit: “Operating conditions faced by Chinese goods producers continued to deteriorate in February. Output and total new orders both declined at slightly faster rates than at the start of 2016, which in turn contributed to the quickest reduction in staffing levels since January 2009. Lower production was a key factor leading to the steepest fall in stocks of finished goods in nearly four-and-a-half years during February. At the same time, lower intakes of new work enabled firms to marginally reduce their level of work-in-hand for the first time in ten months. Prices data indicated weaker deflationary pressures, with both selling prices and input costs
declining at modest rates.”

On a 3mo MA basis, 3mo average through February stood at 48.2 - second lowest in the BRICs, up marginally on 48.0 3mo average through November 2015, but down on 50.0 3mo average through February 2015.

It is simply impossible to imagine how this data can be consistent with 6.9 percent growth recorded in 2015 or with over 6% growth being penciled for 1Q 2016.

As shown above, China is now a consistent under-performer in the BRIC group since July 2015 with its Manufacturing PMI reading below that of Russia (in a recession) and above Brazil (in a deep recession).

2/3/16: Russia Manufacturing PMI: February

Russian Manufacturing PMI for February produced another disappointment, falling from a marginally contractionary reading of 49.8 to somewhat faster contraction-signalling 49.3.

Per Markit, “Russian manufacturers reported a further deterioration in operating conditions during February, the third in as many months. Job cuts
were evident amid a sharp fall in backlogs of work. However, production remained broadly unchanged as a slight rise in new orders was reported. Meanwhile, price pressures remained evident, as both output charges and input costs rose.” So firms effectively were reducing their backlogs of orders, with work-in-hand reductions continuing now every month since March 2013.

On a slightly positive note, per Markit: “Russian goods producers recorded a slight expansion in new business volumes during February. According to anecdotal evidence, a higher volume of new work reflected the development of new products. However, the rise in new orders was driven by the domestic market, as new export orders declined further. The rate of contraction accelerated to the sharpest in 19 months and was marked overall.”

On a 3mo MA basis, 3mo average through February 2016 stood at 49.3, which is lower than the 3mo average through November 2015 (49.8), but still better than the 3mo average through February 2015 (48.7).

So the key reading from this data is that Manufacturing remains in a shallow downturn for the third month in a row, signalling a poor start to 2016 and leaving no doubt that the economy is now set to post another quarter of negative growth, unless there is a major improvement in Services sector readings in February and a major gain across both sectors in March.

29/2/16: GE 2016 - Ireland's Answers to No Questions Asked

The election 2016 is a catalyst-free contest that has been shaped by the political parties attempts to understand the mind of the electorate, while the electorate has been struggling to make up its mind about what the pivotal issues of the election should be. Compounded by the  epic gaffes of the reality-skipping life-time politicos (take that Enda Kenny pill, ye old comedian) and we had an election devoid of real ideas and ideals as far as the mainstream parties go.

Harder Left and genuine Centre-Left (e.g. Social Democrats and majority of the independents) have attempted to focus the elections on the issues relating to the lagging nature of economic recovery in the domestic sectors - an issue that, traditionally, has been the core breadwinner for the Labour. However, having completely abandoned any pretence at ideals-based, principles-rich politics, the Labour has thrown its weight behind the FG-led attempt to steer plebiscite into a debate about a general (and to majority of us abstract) notion of policy continuity and stability of governance as the panacea for the ‘continued recovery’. Topical issues and specific policies aimed at actually producing a real recovery that is not stuck in the canyons of tax arbitrage by the MNCs became the victims of this absurd departure from the world of the living into the world of FG/LP.

Even shielded from competition by being effectively the only Right-of-Centre (in the Politics of Boggerville 101-style of Enda Kenny and Michael Noonan) party, FG has managed to squander the election by such a massive margin, one has to wonder how on earth can the party continue to pretend to represent anyone other than a handful of clientilist farmers, rent-seeking businessmen and a bunch of conservative civil servants. 

Not surprisingly, the key battles of the GE2016 have been waged in the contestable space created by Labour’s departure from its social and electoral core. 

Failure of Labour and FG to consolidate Centre-Left and Centre has meant that the FF was left significant room to recover some of its electoral fortunes. In a typically FF fashion, the ‘new party of the Centre-Left’ has managed to deliver very few tangible new ideas, but provided plenty oppositional rhetoric and old-fashioned pork barrel promises.

All in, Election 2016 was dominated by the lack of big thinking, shortage of specific ideas, and a large doses of surrealism. Neither global, nor European context entered the mainstream debates; economics swung from ‘tax and don’t spend’ to ‘don’t tax and do spend’ heralding the arrival of the Celtic Tiger 3.0. The entire circus of the ‘fiscal space’ debates was yet another opportunity for Enda Kenny to play the role of a cross between the U.S. Republican contestants Ben Carson and Jeb Bush - a dynamic combo of a man who can’t run for the office and a man who doesn’t know he wants to run for the office. Money, advisers, analysts, party machines and even track record - all squandered on disconnecting from the voters.

In contrast, three smaller political groupings / parties: Renua from the Right and Social Democrats from the Centre Left and the Independent Alliance have mangled to produce far reaching, ambitious, even if, at times, poorly structured policies proposals. The Independent Alliance and Soc Dems have fielded some really strong, highly impactful candidates with ideals and occasionally ideas of their own. These three forces, relatively weak and surrounded by a sprinkling of other independents and political groupings brought into Election 2016 something missing in Irish politics - integrity, honesty, openness and debates. No matter how strong their showing in the current Election has been, they provided a crucially important alternative to the stale politics of Irish elites: the Axis of FG, FF and Labour.

The most surprising aspect of the Election 2016 is the complete and total disregard by the core political parties for the voter perception of Irish politics as a palace of parochialism, corruption and cronyism. After 5 years of the current Coalition effectively replaying old FF book on cronyism and favouritism, while droning on about the ‘New Era in Politics’, the litmus test of this electoral cycle should have been a focus on political system renewal and reforms. This simple was a task too difficult for the political system to handle and even contemplate. Which, sadly, means that our Permanent Government - the cabal of unelected advisers and senior civil servants - remain in place, aided and abetted by the school of hungry and agile piranhas from the private sector always ready to issue a research note or two about the need for continuity, the necessity of predictability, the value of stability and the fabled markets’ longing for conformity with the status quo.

All hail Tipperary North constituency for delivering much of it in a concentrated form once again… 

Which brings us around to 'predicting the future'. It will be the same as the past.  

Any coalition involving FG will be a poison chalice to either FF or FG or both precisely because although FF lacks ideas, at least it is based on the ideal of a pub-pump-politics that connects with wider ranging population. FG can't even muster as much. Despite the fact that the latter has a better pool of younger cadre than the former, in my opinion, and has been better in governance too (although here we really are setting the bar low to begin with). FG will continue to play the 'extend and pretend' card in any power deal, hoping the miracle of recovery (sooner or later, it is bound to happen in a meaningful way, or so the theory goes) will sustain them into the next election. Which means their track record will be woeful - no reforms, no change, just throwing pennies and dimes at problems as soon as Michael Noonan can rake them in. 

For FF, such a scenario won't be good enough because the party needs desperately to rebuild and re-energise its base (which it started doing in the GE 2016, but is yet to complete).

Any other coalition (involving Independents) will not be stable, as FG seniors clamour for top brass positions, while the Independents largely want the same. Competition is an unbearable condition for Irish elites that prefer to play a 'spread others' butter on your spuds' game.

Alternatively, the whole circus tent might come down and we might go to the polls once again, comes late 2016 - early 2017, especially if the 'fiscal space' gets shocked a tad.

I'd put 30-35% chance on the GE2016.2.0, an a balance on the FF/FG shotgun marriage, and a 40% change on GE2017. Though, of course, miracles of the parish priest and the publican agreeing with the AIB branch manager down at the pub on where to put that new Centra in town do happen, still... Harmony might be attained.

28/2/16: ECB in March: A Thaw or a Spring Blizzard?

My comment on what to expect from the ECB in March for Expresso http://en.calameo.com/books/004629676f86bc6c6796a.

As usual, full comment in English here:

While the transmission mechanism has been improving in recent months across the euro area, leading to stronger lending conditions across the common currency area and a wider range of the member states' economies, inflationary dynamics remained extremely weak, even when stripping out the effects of oil and other commodities prices. As the result, ECB continues to see inflation as the key target and is likely to intensify its efforts to boost price formation mechanism.

Thus, despite all the ECB efforts, inflation remains stubbornly low and even slipping back toward zero in more recent data prints. Improved lending is not sufficient to create a major capex boost on the ground, weighing heavily on growth dynamics. Lower costs of borrowing for the euro area governments, while providing significant room for fiscal manoeuvre, is simply not sufficient to sustain a robust recovery. About the only functioning side of the monetary policy to-date has been the devaluation of the euro vis a vis the US dollar - a dynamic more influenced by the Fed policy stance than by the ECB alone.

My expectation is that the ECB will cut its deposit rate to -40 bps (a cut of 10 basis points on current) with a strong chance that such a cut can be even deeper. We can further expect some announcement on an extension of the QE programme beyond the end of 1H 2017.

The key problem, however, is that the ECB is also becoming more and more aware of the evidence that past QE measures in Japan, the UK, the euro area and across Europe ex-Euro area have failed to deliver a sufficient demand side boost to these economies. Thus, in recent months, the ECB has been increasing rhetorical pressure on member states governments to engage in supply side stimuli. Unfortunately, this too is a misguided effort.

In the present conditions, characterised by markets uncertainty, heavy debt overhangs and mis-allocated investment on foot of previous QE rounds, neither supply nor demand sides of the policy equation hold a promise of repairing the euro area economy. In addition, accelerated QE will likely feed through to the markets via higher volatility and possible liquidity tightening (bid-ask spreads widening, fear of scarcity of high quality government bonds and uncertainty over viability of the current monetary policy course).